What Does the UK Gilt Market Volatility Mean for Pension Scheme Governance?
It’s been a rollercoaster in the UK long-dated bonds ‘Gilt’ market over the last week. For many pension schemes there will have been a financial impact. For trustees there are also governance lessons to be learned.
For UK defined benefit pension schemes the impact of the last couple of weeks gilt yield movements on their funding position will have depended on how extensive their hedge position was, how much leverage existed in their LDI portfolios before the week started and how quickly they could liquidate other assets to meet collateral margin calls.
Gilt yields had been headed upwards before the mini budget and arguably political actions accelerated that trend. Certainly, the Bank of England intervention last Wednesday put the brakes on and has restored yields to pre-mini budget levels.
So, what does all this mean for pension scheme governance going forward?
Those Trustees who were able to make very quick decisions may have been better able to protect the funding position, but only if they had enough highly liquid assets to sell. Pre-agreed delegated decision making in a crisis can pay off. Getting a large trustee board together to make strategic decisions in a crisis can be difficult at short notice. Defining how much decision making is delegated is important but putting too many constraints around it can negate the benefit of the delegation.
After many years of low gilt yields were too many trustees complacent about liquidity needs and underestimated how stressed the markets could become? It certainly paid off to have a lot of very liquid assets this week. Trustees need to make a risk assessment around layering in different levels of liquidity and properly stress test the effectiveness of their liquidity plans and assess how they may need to rebalance their portfolios after a run on their liquidity. A week can be a long time in a stressed market.
There’s value in keeping an eye on political changes that might lead to policy changes and particularly when markets are already unsettled. Usually, mini budgets have minimal impact on markets, but not this time. Trustees should think about what they can do to monitor for potential politically driven policy changes and how they might put contingency plans in place.
A lot of analysis will be going into the financial impact of the recent gilt yield moves. Trustees will also benefit from reflecting on what changes they should make to their crisis governance preparedness and processes.
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